We have not heard much about the euro crisis for a few weeks now. Presently we are trading in very disinterested low volume, with nothing from Europe influencing us for the last two weeks. But if news picks up, that could change. We still have to face news about the financial sector of Europe that is very vulnerable right now.
Greece will be back in the headlines as it pleads for an extension to meet its budget requirements. I believe it is looking for an extra two years. Greek Prime Minister Antonis Samaras' is visiting France and Germany looking for the extension. The country is in a very tight predicament with very little room to move as investors are impatient and not in the mood for games. And there was been some discussion on cutting Greece free in German circles. If it happens, it would be manageable. Well, it may be manageable but it would be expensive for Greece and all of Europe. But now it will be interesting to see how Greece reacts since Chancellor Merkel has taken the position that there is no room for movement for Greece.
Looming not far behind them is Spain- will it ask the ECB for a bailout? It is a hard process to negotiate as Spain cannot collapse, but at the same time both sides must agree to certain austerity conditions. It's a kind of cat and mouse game that is being played.
Bonds for the peripheral countries have bounced off their lows in hopes the ECB will act. ECB chief Mario Draghi made mention that the central bank may again start buying government bonds to reduce crippling Spanish and Italian borrowing costs. Other governments are going to join in the bond buying. It will be sometime in September before anything could take place because Germany's central bank is not to keen on participating in it and a series of meetings have been set up to try and work through it.
The fear of having such low bond prices is that returns are so low, investment interest just is not there. This in turn can lead to a recession, as everyone just holds on to their money. People need to start buying bonds this fall and not sell them off.
Besides Greece and Spain presently, it would not be surprising if France suddenly entered the limelight with a struggling economy. European economist Jennifer McKeown of Capital Economics predicts it will take but a year for the large European economy to be in a recession. Not only France. She goes on to say:
We still see both Germany and France slipping into recession in 2013.
Even though exports are fairly robust right now, shrinking demand from the U.S. and Asian markets are expected to lead to a steep decline. The weakening euro and strengthening dollar is also adding to this forecast. And France's GDP has shown zero growth for three straight quarters. Germany was also mentioned, but it is France that investors should keep eyes on. The reason for this is that France is more reliant upon eurozone trading and there is not going to be a revival of spending there to offset the slowdown expected to hit the country.
So this is what we have to look forward to these last two quarters of 2012 and into 2013. As investors, it would be prudent to keep abreast of Greece and Spain in the coming months and follow how the bond buying situation is progressing in Europe.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
